Foreign Investment in Iran Economy;
Longing for Domestic Bodies’ Unanimity
By Mahdi Goodarzi
Have you ever wondered why only a handful of foreign investors have actually entered Iran Economy and started trading in Iran’s capital market after so many visits and meetings within the last 2 years? Why on earth Iran’s securities market have not been decently welcomed despite holding numerous seminars, roadshows and exhibitions focused on the absorption of foreign investment? Is it that Iran’s capital market does not actually have what it takes or we should look for something else?
During the past 2 years, we have sat with more than 300 foreign investors, both individual and institutional, including representatives from brokerage houses, investment companies, investment funds as well as asset management, the result of which will be explained below. In fact, this writing comes from hours of meetings with foreign investors and domestic financial bodies over the topic of attracting foreign investment and it aims at convincing decision makers in the country to pay special attention to this subject through the capital market.
The current article hovers around the following 3 principles, which will be explained thereafter:
- Supportive rules and regulations;
- International banking mechanism; and
- Companies’ administration and financial reporting.
Rules and Regulations
As you may know, the Foreign Investment Promotion and Protection Act was approved in Iran in 2002 and reviewed in 2010. It contains several instructions, including the Bylaw of Foreign Investment in the Exchange and OTC markets approved on 18 April 2010 and the Administrative Instruction of Foreign Investment in the Exchange and OTC markets approved on 3 October 2011. Considering the fact that the regulator did not keep foreign investment attraction through the capital market in mind when approving the mentioned law and its content mainly addresses foreign direct investment, the capital market potentials in absorbing foreign investment have not received much attention.
To be more specific, the non-familiarity of the regulatory body with investment attraction potentials through equity and debt securities can be felt in each paragraph and clause of this law. Therefore, the review of its content in terms of the undeniable role played by the capital market in attraction and management of foreign investment deems necessary. Although investigating the details does not fall within the realm of this article and is in need of hours of study and discussion, the following items, at the very least, must be revisited:
- Removing ambiguity over the pertinent rules and instructions;
- Considerations when transferring foreign exchange both into and out of the country;
- Formalities when taking resources out of the country;
- The supervisory authorities;
- Limitations over investment divesture;
- Definition of strategic investor;
- Actual and operational incentives;
- The role played by the Securities and Exchange Organization of Iran (SEO); and
- The interactive structure between correspondent bodies: the Organization for Investment, Economic and Technical Assistance of Iran, the SEO and the Central Bank of Iran (CBI)
Paying enough attention to the above mentioned can contribute to the improvement of regulatory infrastructures for absorbing foreign investment through the capital market while denying that will send the opportunities to attract foreign investment away.
Being all said, we should deeply understand that no miracle can be expected when holding on to inefficient mechanisms in today’s competitive world. It is true that foreign investors are interested in investing in Iran; however, they are afraid of any kind of ambiguity, non-transparency, and lack of legal support systems and will not enter their hard-earned resources in Iran’s markets, if not removed.
Many attempts have been conducted to introduce Iran as one of the lucrative investment destinations in the world; unfortunately the current banking, legal and regulatory infrastructures are not designed to properly serve the purpose of hosting foreign investors who are eager to inject their funds into Iran’s capital market. The second priority, then, will be the banking and fund transferring issue which itself calls for the correspondent relationship, as the most important issue, between Iranian banks and their foreign counterparts which are active in the capital market area since opening bank accounts with all banks is not possible; stressing on the last part originates from the fact that although there might be many banks having correspondent relations with Iranian ones, many of them will not offer services related to the capital market. As can be seen, identifying and negotiating with such banks, which are keen to cooperate with Iranian ones, is of vital importance. It is worth mentioning that small European banks have taken steps and even now offer custodianship services to foreign investment funds; however, such services are not presented in large scales and by medium-sized European banks.
Whatever the reason for not, the banking system non-cooperation and its procrastination in meeting the requirement will result in nothing but the loss of opportunities for attracting foreign investment into the country. In this regard, the undeniable role of the CBI in encouraging qualified banks to participate in this area cannot be left unnoticed. As a start, paying attention to the following might lead a way:
- Training and enabling the banking system task force to offer services to international financial bodies;
- Doing due-diligence FOR Iranian banks as a trust-earning step;
- Applying the IFRS system on banks’ financial statements;
- Adopting identification mechanisms such as KYC and KYCC;
- Applying Anti-Money Laundering rules and regulations;
- Stress testing the balance sheet;
- Evaluating the counterparty risk;
- Launching the compliance unit;
- Establishing correspondent relations with specialized banks; and
- Investigating conditions for introducing international custodian bodies.
The vital issue in the banking area is the CBI’s concerns over foreign exchange market supervision. Currently and even after the CBI’s recent circular on allowing banks to operate trades in foreign exchanges, how banks should report their trades in foreign exchanges for foreign shareholders, who have the trading license issued by the SEO, is still vague; this pushes foreign investors further and further away, as the transparency over taking money in and out is of key importance for them.
Administrative Structure and Financial Reporting
The major topics to be addressed are as below:
- Corporate governance weakness
- Shareholder support system against rogue corporate managers
- High number of state-run companies; and
- Individual shareholder interest’s support system weakness.
The above mentioned are important since they cause a significant difference in companies’ share value between foreign investors and Iranian owners and managers. Furthermore, evaluating the corporate governance system in Iran is not a piece of cake because first of all, there is little information on its structure and secondly, no comprehensive analysis can be found on its quality in companies. Based on past experience, it is realized that creating proper corporate governance plus supervising its correct implementation play the most important role in emerging markets. Unfortunately, there are many risks arising from lack of corporate governance in the country, which act as a huge impediment against the capital market development, attracting foreign investment and enjoying financing opportunities.
All in all, low financial transparency, non-compliance of large companies’ financial statements with IFRS measures and the shareholding structure which boycotts certain companies owned by the state or other organizations have hindered the international development of Iran’s financial markets; consequently, the regulatory body of Iran’s capital market is kindly advised to focus on adopting transparent and efficient rules and regulations to oblige the implementation of corporate governance as well as individual shareholder’s interest protection. At the end, it is worth reminding that unless taken into consideration by authorities, any attempt to enhance foreign investors’ access to Iran’s capital market will be inefficient and fail to lead the foreign investment potential towards the stock market and particularly the debt market of Iran.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
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